Find out if savings bonds are a good idea for Christmas presents

Published: Sunday, December 21, 2008

ERIN CONROY

Q: I'm considering buying savings bonds as holiday gifts for my nieces and nephews. Are they a safe and worthwhile investment?

A: Savings bonds are guaranteed by the U.S. Treasury Department and safe from today's financial turmoil. While it may seem old-fashioned, giving savings bonds is a good way to teach kids about investing and could give them something to look forward to once they're older.

But it could become problematic down the road, as assets in a child's name could hurt their chances of qualifying for things like college financial aid.

In most states you can buy gift savings bonds at banks and other financial institutions in amounts between $50 and $10,000. But it's important to note that when you buy a gift bond, it can take as long as three weeks to arrive by mail from the Treasury. So plan ahead.

There are currently two kinds of savings bonds that can be bought as gifts: Series EE and Series I. Paper Series EE savings bonds are popular, mostly because they can be purchased at half of their face value. In other words, a savings bond with $100 printed on it will cost you only $50.

As of May 2005, interest rates for new Series EE bonds no longer adjust every six months. Instead, the rate is fixed for 20 years before the Treasury has the right to adjust it. Currently, the rate is 1.3 percent for bonds purchased through April 30, 2009. Comparatively, the national average rate on interest checking accounts is currently around 0.2 percent, while a one-year certificate of deposit is more than 2 percent.

The rate for Series I bonds - purchased online via TreasuryDirect.gov - is higher. It's set at 5.64 percent through the end of April, but it adjusts the last six months of every year, based on the national rate of inflation. The interest rate can dip as low as 0 percent, but even that averages out annually to be higher than the rate for Series EE bonds.

Because Series I bonds don't include any kind of certificate or paperwork, they may not make a great gift. And unlike the Series EE bonds, they are sold at face value rather than half.

Both types of savings bonds earn interest for 30 years. They cannot be cashed out until you (or the person you give them to) has owned them for a year, and there are penalties if you redeem them before five years are up.

When buying the bonds, you'll need to give a Social Security number, which won't be used for tax purposes but to track the bonds if they are ever lost. You may want to use the child's Social Security number: In 30 years, they may not think to check for a lost bond under Uncle Fred's.

"Savings bonds are the safest place to invest in this financial crisis, and everyone is moving money into government securities like these," said Tom Adams, author of "Savings Bond Advisor."

Choosing whose name to use to set up a bond is where things start to get tricky, he said. Savings bonds are exempt from state and local income tax. But, as we mentioned, they count as assets of a child or the child's parents when it comes time to apply for financial aid for education and other purposes.